The GCC’s private equity market has grown too far, too fast, meaning that some firms will be forced to exit the sector, a local expert has warned.
“In most markets, private equity growth is slow and steady and goes through cycles, so you start with a few funds, then raise more money and basically reach around fifteen to twenty funds after 30 years or so,” Eastgate Capital special purpose private equity manager Nasr-eddine Benaissa told Arabian Business.
“In this region, there was no cycle. The growth was sudden, starting in 2001, and by 2006, you had God knows how many private equity firms – probably 45 or so.”
When asked whether the overcrowded nature of the market would force some players out, Benaissa said that “it has to happen”. “Not everyone has the right to go to the next phase, it’s a rule of nature. Some firms will be exiting the market, either by consolidation or closing down,” he added.
“Whether that will happen this year, I don’t know. Usually such firms tend to have a commitment from the clients, and you can’t walk away from that. But you have to understand that the market here is too small to accommodate the number of private equity firms that are currently active. Not all of them have the performance and the investor support required to sustain their business.”
In mid-July, a report released by the Gulf Venture Capital Association said there were some grounds for optimism for the embattled local private equity system, given that firms had raised $1.25bn in the first quarter, an eighteen percent increase over the whole of 2009.
But the research also revealed that around $10bn committed to private equity funds had remained uninvested, although some funds were expected to release investors from their future commitments.
Benaissa indicated that the inability of investors to exit the market with their money had effectively led to a standstill.
“You have an unusual situation where people have over-committed and can’t exit from those commitments. Plus, frankly speaking, they have been a bit disillusioned in that growth was too quick and too strong, and they’re wondering whether to put in more money or not,” he added.